How many people still have an avatar on Second Life or surf the web with Netscape or watch their favorite TV programs on Joost TV? Fewer every day, as these Internet stars have rapidly fallen from grace.
Among these declining stars, AOL is one of most striking examples. Ten years after its landmark and disastrous union with Time Warner – the largest merger in history – AOL regained its independence in December 2009. In all sectors of the economy, certain corporations stand out from the pack, enjoy dazzling growth, attract large investments, and then vanish as a result of an acquisition or by simply running out of cash. But the wheel of fortune spins much faster in the Internet space, thanks to factors including fast evolving technologies and services, a lack of appropriate business models, and large corporations from traditional sectors unwilling to let new golden boys eat their lunch.

AOL was surpassed by competitors who better aligned themselves with customer expectations. Founded in 1985, AOL originally offered limited web access to exclusive services in return for a paid subscription. However towards the end of the 90s, as the web became more diversified, companies such as Yahoo!, offering free web access to the entire Internet, along with online services such as email and news feeds, became the consumer’s choice. AOL reacted to this new trend with a wave of acquisitions of companies such as instant messaging provider ICQ and Netscape.

These two moves were resounding failures; AOL managers were marketing and mass consumer experts, not technical engineers like Netscape and ICQ staff, which lead to a clash of cultures. The subsequent merger with Time Warner only made things worse. Another clash between Time Warner’s TV and magazine people and AOL’s marketing people, with multiple clans on each side working against each other. The results were quick and bad. AOL lost ground, and today subscriber numbers have plummeted to 5.4 million, from 26 million in 1999. Staff has been reduced from 20 000 to less than 7 000, with an additional 2 500 lay-offs recently announced.

Another notable declining star is AltaVista, the search engine that was once the most used service on the net. However when Google charged onto the scene with its ultra minimalist home page and above all its more relevant, precise and fast algorithm, it shook up the entire net in just a few weeks!
Second Life’s light did not shine for very long either. Two years ago this IT program, published by Linden Lab, was in the headlines and on the tip of everyone’s tongue. Blending traditional elements of online gaming with social networking, players were able to build virtual worlds in 3D, and big name brands scrambled for advertising space. But Second Life quickly fell out of fashion as social networking sites like myspace, Facebook and Twitter emerged, which better met user demand for video and photo sharing, rather than creating a virtual image of themselves.

More powerful rivals are what thwarted Netscape’s magic trajectory. In the early 90s, the Californian start-up seemed destined for a great future. The company was one of the first to launch an Internet navigator. When the company went IPO in 1995, it enjoyed such valuations (US$2 billion in the first day) that many saw it as a major instigator of the Internet bubble. At the time, Microsoft had the same strategy as AOL. With its MSN portal, the largest software company in the world provided Internet access only to paying customers. But when Microsoft realized that end-users were eager to access the entire Internet, and could contribute improving and creating more attractive applications, it dumped its initial strategy, acquired a technology similar to Netscape, and released its own navigator, Internet Explorer, that was included with Windows, which operated in the majority of PCs worldwide. Netscape did not stand a chance despite numerous legal attempts to challenge Microsoft’s monopolistic domination.

Another example is Joost TV, which also had to face stronger and faster competitors. In November 2009, online advertising company Adconion purchased the remaining assets of the start-up, ending a journey that began with founders Janus Friis and Niklas Zennstrom who were the creators of music sharing site Kazaa and Internet telephony service Skype.

Joost offered a platform to download videos and TV programs based on the same file sharing techniques as Kazaa. Users could download and share video. But negotiating copyright issues proved harder than anticipated and Joost could no longer compete against the increasing size of Youtube or Hulu (the web TV arm of News Corp, NBC Universal and Disney). These media giants preferred to distribute their own content themselves.

Finally, unprofitable economic models have caused promising companies to go bust. Skype is one example. When eBay acquired the assets in 2005 for US$2.6 billion, Skype promised to challenge the long-established domination of telecommunication giants. Today eBay has withdrawn from the venture and sold 70% of its stake. Skype is without doubt a huge success in terms of audience, with over 530 million users, but its revenues remain at a modest US$700 million or so in 2009. Internet users readily adopt free services, but few of these convert into paying subscribers, especially in a context where service providers are increasingly offering triple play services. These offers include unlimited calls in various countries, thus making Skype’s paid offering much less attractive.

How to monetize audience and usage success remains a pending question for many online application and content providers. The perfect balance between ad revenues and paid subscription services has yet to be found.

Enjoy!

Adlane Fellah
Maravedis CEO & Founder

For more information, contact the author at afellah@maravedis-bwa.com

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